Will Qualified Mortgage Rules Drag On as Long as RESPA?

WE’RE HEARING…that while the qualified mortgage definition is approaching a deadline this month, there are some in the securitized market worried about the rulemaking dragging on.

Or as SNR Denton partner Stephen Kudenholdt jokingly said at a recent American Securitization Forum meeting on the topic, hopefully discussions we’re having about it now won’t be the “first annual” ones.

So far indications are that the qualified mortgage definition that is being designed to protect both originations and secondary markets from ability-to-repay requirements will not take as long as, say, reform of the Real Estate Settlement Procedures Act. Of course, that’s true about almost anything!

But QM is a pretty big deal. As Kudenholdt put it, it’s the first major rulemaking the securitization industry will be dealing with this year. And it will take more time to figure out.

There has been a lot of debate about how much of the market QM loans will represent. Andrew Miller, senior vice president at The PNC Financial Services Group, told ASF seminar attendees that Consumer Financial Protection Bureau director Richard Cordray has talked about a percentage approaching 90. But as Credit Suisse vice president Luke Scholastico told attendees at the ASF seminar that whatever officials define QM as, it’s going to be virtually 100% of the market when they do.

Concerns for the secondary market go beyond the assignee liability on the rule that, as Miller noted, exposes investors to the risk of delays in foreclosure and the possibility of paying some damages if there are findings made that a borrower did not have the ability to pay his or her loan. Two other key concerns are pricing and liquidity.

To price and have a liquid market, the secondary needs to understand risks. A key hurdle in sizing up risks based on the ASF discussion is a proposed debt-to-income ratio requirement. Miller said this is the best proxy for underwriting, or at least better than alternatives such as loan-to-value ratios or credit scores. But when Kudenholdt questioned whether DTI is really predictive of default, Miller noted that it is, “perfect in no way.”

Edward Mills, a research analysts and senior vice president at FBR Capital Markets, said that a hard DTI in the QM rule will is going to constrain credit. For this reason and others, I give the QM rule another year before it really gets pinned down—at least.